Ignore Jobs Numbers for Market Timing

Investors look to the Bureau of Labor Statistics (BLS) employment news releases to provide insights for, and confirmation of, their market perceptions. Armed with historical data and associated formulas, the BLS employment numbers help guide investment strategies. Year to date, the US has shed over 750,000 jobs.

The Jobs Train Has Left the Tracks

Since the beginning of the 21st Century, employment trends have changed directions. Consider the declining growth of the non-farm jobs market.

There has been a marked decline in the non-farm employment growth in the USA. The yearly employment growth since 2000 is now only 0.4% compared to 1.7% last decade. The employment / population ratio has also changed.

From 1970 to 2000, non-farm jobs / population ratio for 16 years and older increased from 51% to 62%. Since 2000, the jobs / population ratio has declined almost 4% - this equates to 5 million jobs.

There are other indicators that jobs growth has slowed significantly. Since 2000, there have been 12 quarters of negative job growth. Compare that to 17 quarters of negative job growth between 1970 and 2000 (1970’s = 6 quarters, 1980’s = 7 quarters, 1990’s = 4 quarters). The frequency of negative job growth is increasing.

What's Causing This Change to the Employment Model?

Free trade agreements – Consumers will purchase the cheaper product of comparable value. For labor intensive products, these will be manufactured in the countries with the lowest labor rates. No question there is an outflow of jobs from the USA. The consumers who still have jobs will benefit from the lower prices.

Underground economy – There have always been employment below the visibility of the government – especially in illegal activities. However, there could be growth in a legal cash basis employment.

Unemployable – Living in an area of layoffs (like Detroit for autoworkers or New York for investment bankers) without the skills for alternate employment.

Baby boomers – Baby boomers being laid off who have enough for retirement are probably not intending to return to the workforce. The major impact to the employment model of baby boomer retirement will start early next decade. Despite discrimination laws, laid off baby boomers will have a very hard time finding employment in similar positions they had before being laid off.

Automation - For products where shipping costs are a significant cost element, the USA manufacturers have been and will continue to automate to reduce man power required.

Lack of Investment prevents job creation – The negative effect of a free trade agreement is that jobs will be lost in the country with the highest labor costs. The government has a responsibility to help and organize industry’s research, development and investment in areas where USA can be or is competitive – and thus create jobs. There has been little evidence of the government has understood this concept. Without research, development and investment into new technologies, the ultimate result will be the American worker accepting Chinese wages to survive. If a multi-national company makes labor intensive widgets, it will manufacture them in the lowest labor cost country – it can sell the widget cheaper while its profits will be the same. You cannot expect a multi-national company to look after America’s national interest to keep the population employed.

Points for Investors

The emotional trauma to the person who lost their job is a life event. We should not lose sight of this when we talk about jobs in this severe economic downturn. The social safety net in place for the casualties of main street corrections may be inadequate this time. I am one of those who believe this economic downturn could be long in duration, and will not be followed by a robust recovery.

Although rising unemployment levels signal the beginning of a recession, profitability increases for companies (and the associated stock market averages) return long before the unemployment improves. This is a basic mechanic of capitalism.

The employment model has changed. Past tipping points and equilibriums would have changed also. Using past jobs models to predict the recovery of this market are most likely invalid. A quote from Mark Thoma in a recent Seeking Alpha post is relevant to jobs data:

It's the feeling you have when you suddenly discover that everything you thought you knew about something, something you believed and relied upon for years, is wrong (like when you find out something your parents told you just isn't so). Those are moments that can stop you in your tracks while you reevaluate and figure out what it all means, while you take time to figure out how you should respond in the future.

The preliminary BLS unemployment data released have been understated. A changing model and inaccurate data call into question the Jobs Numbers' worth in evaluating its impact to the market and to the economy.

Disclosures: no positions

Comments

[Roowns:]

.........................
Although rising unemployment levels signal the beginning of a recession, profitability increases for companies (and the associated stock market averages) return long before the unemployment improves. This is a basic mechanic of capitalism.
.........................
This is just wrong. It's valid maybe on short term, but on the long term companies rely on the money employees spend for goods and return into the economy.
The unemployment numbers gives you an image of how demand for goods is looking, because if companies lay off too many it means demand is not good.
Even if labor market drops you still can find some cyclical moves that tells you the story.

We'll look back in 5 years time at this and say : Oh, it was predictable, the history repeated again.
It's a global economy, one that has no reason to stop growing on long term because population is growing at a fast rate. If a country lacks work force will import it.
The model still has no reason to change at this time. We'll all be dead by then.

2008 Dec 01 05:38 AM

[John Lounsbury:]

There are two labor statistics in in the Index of Leading Economic indicators:
1. Average weekly hours of production workers (manufacturing)
2. Average weekly initial claims for unemployment insurance (inverted)

There are two labor statistics in the Index of Coincident Economic Indicators:
1. Employees on nonagricultural payrolls
2. Personal income minus transfer payments

There are three labor related statistics in the Index of Lagging Economic Indicators:
1. Average duration of unemployment (inverted)
2. Change in index of labor cost per unit of output
3. Ratio of consumer installment credit outstanding to personal income

These indexes are maintained by the U.S. Department of Commerce:
www.bea.gov

I agree with Steve that the structure of the labor force has changed and may still have further change ahead. This brings into question how well labor components in the business cycle indexes will track with historical behavior.

I understand the point that Roowns is making, but do not see how it conflicts with what Steve has discussed.

2008 Dec 01 12:16 PM

[Jason Rines...:]

Great article. I was fascinated when Mike Shedlock seemed to be one of the few people that posted the job losses regularly and was startled by the implications. What suprised me most was how few actually commented at the time. Look at this post, three total comments! The guy venting how upset he was about how the institutional investor got burned had dozens of responses. Thanks for posting this Steve. Facts derived from research is what is needed and then a gameplan.

2008 Dec 01 01:59 PM